Do you have an emergency fund?
Well, if you read many personal finance books or blogs, you’ll consistently get recommendations to have one. Typically, I’ve seen people recommend 3 to 6 months of expenses as a part of an emergency fund. Sometimes you’ll see higher, such as 6 to 9 months, but over the years I’ve seen lesser amounts recommended.
I don’t think that’s quite enough.
After giving this some thought of late, I think it’s a very sound approach to keep at least 9 to 12 months on hand for emergencies.
This exceeds what I tend to read elsewhere, but the more I think about it the more it just makes sense.
The big reason I see is that traditional advice for this area of personal finance seems to be stuck in a different time period, under different economic conditions.
In the recent past – prior to the last few years, anyway – the employment situation here in the U.S. just seemed a good deal better. Now, while the stated unemployment may say one thing, I think there are plenty of people out there who have given up looking for work or are underemployed in some capacity. It may not be apparent at all in certain metro areas, but is more than clear in others. In other words, if someone suffers a job loss, it just might take a while to find another comparable position. 3 to 6 months may not get it done. This happens to people all the time.
In addition to job market considerations, what about medical emergencies, accidents, and other health-related crises? Best to plan for just in case something happens. Sure, we have insurance, but that might not cover every expense in the case of emergency. Things do happen to people. While the odds of any one thing happening might be small, when you consider all the risks out there, it puts into perspective the chances of something happening.
What about home and car situations? Maybe your hot water heater will go out, or a sump pump will fail. Maybe your car will break down and require significant repairs. Again, things happen. Sometimes, multiple things can happen at once.
One great thing about having a substantial emergency fund is that is gives you more peace of mind and confidence in your ability to deal with situations such as the ones I mentioned above. There’s something to be said about the “sleep well at night” factor when considering one’s ability to handle sudden financial needs.
Last month, I posted about an interesting survey of which I saw results that indicated nearly 50% of Americans would have serious trouble coming up with an unexpected $2,000 expense. Now, how many months of expenses do you really think that is for most people? No way that it’s anywhere close to the 3 to 6 months mark. Realistically, tons of people are having trouble coming up with money that equates to even 1 month’s worth of expenses.
Saving money can be a challenge for many people, darned near impossible for others it would seem. We all have different lives, and some have some very real, genuine difficulties. So, I acknowledge that finding the money to save 9 to 12 month’s worth of expenses for an emergency fund may not seem easy.
That being said, I think that if somebody (or a family) can build an emergency fund that can push 1 year, it can really alleviate some concerns, stress, and some very real financial risks. Avoiding those things is good, right?
What do you think?
Do you think 3 to 6 months is sufficient for most people, or do you think something closer to the 9 to 12 month range I advocate makes sense?
Do you have an emergency fund for yourself (or family)? If so, how many months of expenses can you cover?